TOKYO, Feb 16: Hours before starting a rapid tour of Asia’s main economies, US President George W. Bush urged Japan to stimulate the world’s ailing second-biggest economy by cutting red tape and clearing up huge bad loans at its fragile banks.

Though his words on the economy were encouraging, Bush took a tough line on what has become the cornerstone of his foreign policy his drive against what he calls the “axis of evil” just a day after Japan offered little more than tepid support.

The first thing that has to happen is the Japanese government must make the right decisions as to how to restructure (nonperforming) loans and deregulate the economy, Bush said before a three-day visit to Tokyo that begins on Sunday.

In a separate interview with journalists from four Asian news organizations, he added that monetary policy may need to be reviewed, the Asahi Shimbun reported in its Saturday evening edition.

Japan’s economic woes and debt-laden banking system as well as its responsibility to play a role commensurate with its size in reviving the world economy will be top the agenda when Bush meets Koizumi in Tokyo on Monday.

The reason I want to discuss that is because a strong Japanese economy is in our nation’s interests, Bush told NHK.

Concern has been growing that Japan’s third recession in a decade could develop into a full-blown financial crisis when banks close their books at the end of the business year in March.

And with Koizumi’s popularity waning, doubts are growing over his ability to take painful steps needed to rescue the economy.

However, sharp US criticism is likely to be kept behind closed doors.

While urging more action, Bush stressed his support for Koizumi’s reform initiatives and his confidence in Japan’s ability to rebuild its economy.

Prime Minister Koizumi has made out a reform agenda and I believe that with his leadership, his vision, the Japanese economy will recover, Bush said in the NHK interview.

But in a sign of the deepening gloom, Moody’s Investors Service on Thursday put Japan’s Aa3 domestic debt rating under review for a possible downgrade to the level of that of Poland or South Africa.

US support for Japan’s efforts at recovery may be tempered by criticism from US manufacturers that the sharp fall in the yen in recent weeks gives Japanese companies an unfair competitive advantage.

But Bush showed no sign of straying from his strong dollar policy in the interview reported in the Asahi Shimbun.

He said that foreign exchange levels should be decided by the markets, but added that sound US policy would keep the strong dollar in place.—Reuters